The Legislative Analyst on California’s New Budget — Hate it!

It’s official.

In the Legislative Analyst’s initial eight-page summary of the budget approved by lawmakers in the early hours of the 100th day of the fiscal year it’s supposed to dictate spending for, the conclusion is that the package is unlikely to balance and certainly won’t improve the state’s chronic gap between spending commitments and revenue.

“We estimate that well over two-thirds of the Legislature’s 2010-11 budget solutions are one-time or temporary in nature,” the analyst says in the top right-hand corner of Page 2.

“This means that California will continue to face sizable annual budget problems in 2011-12 and beyond.”

In its 45-page November 2009 California Fiscal Outlookpublished several months before lawmakers and Gov. Arnold Schwarzenegger began negotiations on the budget finally passed early October 8, the analyst warns of the magnitude of the problem they face and tells the state’s policy makers how they got there.

At the time, the analyst predicted a $20.7 billion shortfall. It ended up being $17.9 billion.

Regardless of the size, the analyst’s observation was equally true:

“Addressing this large shortfall will require painful choices—on top of the difficult choices the Legislature made earlier this year.”

Apparently, according to the analyst’s initial assessment of the newly passed budget, those choices weren’t made.

Irrespective of the actions taken in this year’s budget, the analyst predicted in November that the fiscal year beginning July 1, 2011 – the first budget facing either Meg Whitman or Jerry Brown — will have a shortfall of $21.3 billion, fueled in part by the expiration of more than $7.5 billion in temporary tax increases enacted in the February 2009 budget.

Having more than two-thirds of the current budget be temporary fixes or one-time savings, exacerbates next year’s problem because it means less than one-third of any savings in this budget carries over into the next fiscal year.

And those savings are further reduced by 25 percent by waiting more than a quarter into the fiscal year to enact them.

A potential benefit for the next fiscal year is Gov. Arnold Schwarzenegger’s pledge to veto $965 million in spending contained in the budget plan although those spending reductions will generate only nine months of savings as well.

The analyst also notes in its summary of the current budget, the state gave public schools $1.8 billion less than the minimum schools were guaranteed during the last fiscal year. The state is obligated to give schools that money. Lawmakers spent $300 million this year paying down the $1.8 billion.

Companies with incomes of $300,00 or more will be prevented using past losses to reduce current tax liabilities for two years under the budget plan. This fiscal year that saves the state $1.2 billion. Next year, $400 million. After that, it begins costing the state a like amount.

The budget also contains $2.7 billion in loans, transfers, fund shifts and extensions on loan repayments. Eventually, all must be repaid.

WIth characteristic dryness, the analyst notes that of the $5.3 billion in additional federal funds the budget assumes “most funds have yet to be approved by Congress.” So far, only $1.3 billion in additional federal funds has been earmarked for California.

What happens in the second year of the Brown or Whitman administration?

An even bigger hole in the fiscal year starting July 1, 2012, according to the analyst.

“The shortfall grows … to $23 billion as the state must bear the cost of paying back local governments for borrowing funds pursuant to Proposition 1A.”

The 2004 initiative requires repayment of any state borrowing of local government revenue within two years. The state owes $2 billion.

But there is some good news from the analyst.

“Thereafter, revenues grow by at least 6.6 percent per year and outpace annual spending growth. During the later years of the forecast, spending growth in various health and social services programs is expected to moderate as the economy improves.

“These factors cause the operating shortfall to moderate somewhat—declining to $18.4 billion” in the fiscal year starting July 1, 2014.

That’s down $1.6 billion from the $20 billion shortfall the analyst predicts for the third year of the Brown or Whitman administration.